Motley Fool Money - Everyday Low Prices > Treasure Hunting

Episode Date: December 23, 2024

If your company isn’t a growth business, what’s the advantage of being in the public markets? (00:14) Jim Gillies and Ricky Mulvey discuss: - Why luxury department stores are struggling. - Disney spending $645 million to make two seasons of the Star Wars series, Andor in a ten-ish minute discussion. - What investors should consider before using options to generate income. Companies discussed: JWN, PTON, DISHost: Ricky Mulvey Guest: Jim Gillies Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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The sale at Nordstrom is over. You're listening to Motley Full Money Man. Jim, this is our second recording of the day. We are now on minute 40, 40, 40 of seeing each other. Do I still do the like, hey, it's good to see a thing? Do we, or do we let the listeners know what's going on behind the scenes? Feel free. Let's pretend.

Okay. It's so good to see you. How's your morning going? It's, would have been better if we got up the first take, but other than that, it's great. Let's do this Nordstrom story again. First time for the listeners, though. The theme of this, Jim, is that being a public company is difficult. El Puerre de Liverpool, SAB, is acquiring all outstanding shares of Nordstrom for a little bit more than $24 in cash.

It's a tiny premium for what it goes for today. The Nordstrom family will hold on to a majority of the company as it goes private. But why do you think this storied brand is leaving the public markets here? Because they haven't been rewarded for being public. And also, too, small premium. This has been in the works for a year. I think it was a year ago with December 14th in 2023 when El Puerto de Liverpool filed a public NDA essentially saying, yeah, we're looking at, we're looking at this and we're happy to, you know,

to do it the way you guys want to do it, you guys being Nordstrom family. In September, 2024, there was a preliminary filing offering $23 a share here. So the fact they've settled at 24, 25, like this was coming for a while. And you can see it in the stock price chart this year as well. Nordstrom this year has been a market beater in 2024, which is kind of funny. It's up about 31% this year. But trust me, the 10-year chart tells you a very different thing. They really haven't gotten any advantage for being public.

They don't need to raise capital. So they're not using for capital markets here. They've got some debt. They'll be able to roll that just fine as a private company. And I think they probably said them as well as Liverpool. We're probably just sitting here going like, look, this is a cash cow. We can run it as a cash cow. There's no growth coming here.

The stock being taken out today, it's about 17 times enterprise value to free cash flow, which is fine. It's not a, you know, it's not, it's unlikely to go much higher in the public market. This has not been a terribly great capital allocation. story, you know, they've kind of been a little scattershot as I probably would put it. They've made some kind of questionable repurchases a little bit. They've had some dividends and they've cut them back during COVID and then only brought them back at about half the prior level. And being a public company is expensive. So, you know, these guys can just kind of go away and

milk it for cash and call it a day. This is a big bet for Liverpool, which is about a $7 billion USD. company and Nordstrom is about $3 billion. And there is one brand in there that I'm particularly curious about, which is Nordstrom Rack. And, you know, I like the Nordstrom Rack. I know our colleague, my co-host, Mary, who's listening right now, is a big fan of the Nordstrom Rack.

And also, public markets love T.J. Max. So I guess when you're looking at this, why couldn't Nordstrom Rack be more of a growth story as we're talking about Nordstrom going private right now? People love a treasure hunt, Jim. Well, you know what? People love more than a treasure hunt because Big Lott says high. People love everyday low prices. People love buying in bulk to save a few bucks on a per unit basis. So the luxury department stores of large, and this is the same problem, Macy's, the same problem at Coles. A couple Canadian names I could mention that have long gone now, Eaton's and Simpsons.

We of course saw Sears go away, not so much luxury, but department stores and the kind of the one store fits all has kind of gone away in favor of the, or at least they've suffered in favor of the discounters. Could it have been the next T.J. Max? I don't know, maybe. But I think that people are, I think people are just, you know, more interested in low cost and, you know, and buying in bulk. And that may or may not be some commentary on the high cost of living today, but, you know, it's just some of these things, their time has passed, rightly or wrongly. I don't think it's really that much more complicated. And then the fact that you have the family ownership and the dominance there, it's like,

you know, they're still going to make their millions every year and it'll be fine and there's no tag days for them. But there's no, I was kind of thinking like, what's the incentive to stay public? You're going to get a low to mid-teens multiple on cash flow. Your cash flow is not growing. In my view, at least anyway, there's not a lot of booming upside here. So, you know, take it private, you know, get rid of all the public filing costs. Maybe you can streamline the business a little bit more and then just run it as a cash cow for both Liverpool and the Nordstrom family.

You get access to capital markets. You get more liquidity. If you want to sell some shares, there's some advantages to being a public company, even if you're getting a lower multiple gym. Yeah, I don't think they're going to have any trouble raising capital on the debt side. They get about $2.6 billion in debt. they will have no trouble rolling that. I don't see the potential upside and the value of creation here. So it's like public, not public.

I don't think it's going to really impact anyone's life unless your last name is Nordstrom. Bloomberg reported that in 2018, the board rejected the family's bid to take Nordstrom private at 50 bucks a share. Now it's going for less than half of that. We've seen a similar story at Paramount, which is this family business that refuses to sell when an offer is high. and the growth prospects are subdued, and you have outside buyers coming in and saying, hey, we can cool this melting ice cube if you want to hand it to us in the private markets. Are there any companies you're looking at today where, you know, if the board invited you in, Jim, you would say, you know what, now might be a good time to leave the public markets.

Take the silver. Get out of here. Well, the first thing, guys, I hope the board, the members of the board from 2018, who rejected that $50 bid, I hope they're writing checks to return. all of the compensation they've got over the past seven years to take now a buyout at half. Good job, guys. I don't really follow companies to see them taken out in this kind of negative situation, which is what I think this is. And I think it goes down to, like, I've got lots of companies I think are going to be acquired or I would like to see a takeout. I had one personally on my Canadian service here as being taken out today. It's

kind of got a surprise bid. That's a tiny little company, so it won't go too far there. I'm generally looking, because I play in the small cap space a lot, I'm generally looking and probably about half of my companies over time get taken out. I'm thinking back to, I was the co-advisor for a little fool of service called pay dirt back in the mid-2000s. And I've kept the names from that service, you know, in a little spread you check in occasionally. More than half are gone now. You know, they're a lot of the names. long gone because, you know, just small companies get acquired. So that's kind of what I'm looking at. I don't really look at these companies where, you know, oh, we don't want to take it out.

We don't get taken it. Okay, fine. Now we'll take a buyout when you've eroded shareholder value for half a decade. That's not my jam. I will say, though, that there's, there are some companies I think would probably benefit from being out of the public eye. And the one that I think should probably be folded into a larger connected fit. player at some point, although we won't say Apple, but maybe Google and their fitness app because they did buy Fitbit. Is Peloton. I think Peloton, they finally got the right people in charge, or at least better people in charge. They finally decided to stop bleeding cash. They finally decided to fix their balance sheet as best they could, given they were

kind of over a barrel. I think there's still a really nice subscription business hidden in there, even though their hardware is not selling as well as it was during the pandemic, for what I think are obvious reasons. I think the value of, and especially as they've got the app, so you don't even actually have to own hardware from Peloton anymore to play here. You can own the app and pay the subscription there and use your own material and your own hardware. So I think at some point they'd be my candidate to go away, but unless you want to. I think people, you know, hope springs eternal.

And I think, you know, companies always think they can be the ones to turn around. New managers think they can always be the ones to turn it around. Heck, investors buying a, you know, I like to call it the cult of the value investor, of which I am a card carrying member. We always think a turnaround is going to come around. And some of them do, but some of them don't. Nordstrom, public, private. I don't think we're going to be missing out by them going away.

And I think Peloton, you know, if it gets taken out and, you know, next couple of a couple years, you know, $20, $25. It wouldn't shock me. All right. We're going to move on to a story that is significantly more personal to you as I, you know, the listener can't see this. I'm looking behind Jim's shoulder and I see a Stormtrooper Bumblehead certified Star Wars fan. This caught my attention. Forbes reports that Disney will spend more than $600 million on making two seasons of Andor. The second season coming in at $345 million. We'll go from the fan perspective and the investing perspective. You know, is a lower-level Star Wars fan than you?

I like the first season. I thought it was pretty good. Practical effects are expensive. I didn't know they were that expensive. But I'm looking at this. And my back of the napkin math is that these episodes are going to be about two times more expensive than the final season of Game of Thrones. As a Star Wars fan, are you happy to see?

see this investment in a gritty adult Star Wars series. Heck yes. It's not my money. Spend away. Go ahead. The same thing I have when I see Juan Soto or Shohai Otani sign for whatever they sign for. It's like, it's not my money. You know, go get paid, guys. Yeah, so I'm fine with this. I will also say that this is supposed to be the final season of Andor. It's only going to run two seasons. I will humbly suggest without seeing it that the final season of Andor will be better than the final season of Game of Thrones. That might be more of a comment on Game of Thrones.

But anyway, I'm happy to see it because I will hold that there are two distinct eras of Star Wars. There's before Disney and after Disney and before Disney has its issues. The prequel trilogy is a step down from the original trilogy. I hold and or is the best thing they've done since they acquire. I'm going to loop Rogue 1 in there as well because Andor is technically a prequel to the movie Rogue 1. Disney has not had any real clue how to hold and monetize Star Wars. Now, I think they're going to lose their shirts on this, given the cost of this, because it is the least watched Disney Plus show, at least until the Acolyte aired.

If you tried watching the Acolyte, you'll know why that one failed. I did, and I do. But I mean, why was Andor the least watched Disney Star Wars show? And the answer is, in my opinion because the stuff they had before was scattershot, the tent pole movies, so the episode seven, eight, and nine, they didn't have a coherent plan and they didn't have a coherent story. Episode eight seemed to be trying to monkey with what they set up in episode seven, and so episode nine was trying to fix episode eight. Poor character writing. Finn's a big hero in the first one. Oh, now he's a joke in the second one. Ray is perfect the way she is, so who cares? Captain Fasma was a waste, Snokes the Big Bad, oh, he's not.

It was completely incoherent. The lesser, the non-trilege movies, Rogue One is excellent, but it's excellent because it was a more adult and they took some risks. Solo is fine. But then what TV shows have they done? Well, the Mandalorian, the first couple seasons are fine. The third season was terrible. Obi-1 Kenobi was a joke. The Acolytes joke.

Season 7 Clone Wars was fine, but Bad Batch was kind of mundane. So, you know, they've been very scattershot and they don't know what they have. And another thing, too, is what I've said here. So we went to the Star Wars Land at Disney. And yeah, you can see a bunch of stuff behind me and what you can't see is all the stuff on that wall and you can't see the stuff downstairs. Like, there is a lot of Star Wars stuff in this house and we'll leave it at that, including some very nice artwork.

You don't realize the Star Wars stuff to you look closely. So we went to Galaxy's Edge in Disney a couple years ago and we were quite excited. And I took money because I have money. and I am willing to spend it. Disney, take my money. I didn't buy anything. I walked out because everything they are trying to sell you at the Disney Park is not Han Luke Leia R2.3PO. It's not Darth Vader, Stormtroopers. It's not the classic stuff that people who have money are willing to buy. It wasn't that. It was all stuff from the sequel trilogy. I don't, I'm sorry, I don't want a run plushy. I don't care. The character didn't resonate. The character was uneven anyway.

But when they've had good writing and Rogue One is good writing, Andor is excellent writing. I would say that the Luthan speech, anyone who's seen Andor, the four people have seen it, will know what I'm talking about when Luton talks about what he sacrifices. And it's gritty, it's adult, it's actually showing what life is like under this totalitarian government and that it's oppressive and that it's hard and people are going to die. This is a mature story being told by a really good storyteller because you go look at a lot of stuff. It's kind of played for laughs. And it's like, you know, Star Wars can be funny, but that's not the primary motivation. Like Hans Solo, funny guy, right? Princess Leia had some

pretty good lines in the original Star Wars. But it's not, you know, humor isn't the end all and also too, and this is just a personal thing, and this is more Star Wars than anyone when I ever wants to hear from me. The totalitarian fascist government in charge, which is what the empire is. Under Disney, they're clueless rubs that can't do anything right, especially some of the, like, it's a joke. And if you don't give consequences to your characters, people aren't going to take your characters seriously. Well, IP management, including Star Wars and Beyond Star Wars, is something that, Disney seems to be struggling with. They had a movie open this weekend that is underperforming with Mufasa.

And, you know, these are fond memories people have as children. And they're kind of struggling to get people back to the movies to go see them. I think of, I think of the Daisy Ridley's character in Star Wars. That's Ray. Ray, excuse me, Ray. And in one of the new movies, they have her essentially speed running through Jedi training. She's perfect. And when you think of like the original trilogy, Luke Skywalker has to go through some stuff with Yoda in order to be a Jedi.

And I think there's just some fundamental misunderstandings about storytelling under this new regime for Star Wars that I don't understand why they don't understand it. You're exactly right. And again, I think Daisy Ridley did fine with what she had, what she had to do. But the character was written where she gets everything almost instantly. And so there's, you know, the classic hero's journey, the hero has to suffer in order to overcome. And that's not, you don't see that. But you're exactly right. I mean, especially at Lucasfilm.

Disney's having problems. But even at Lucasfilm, like the Indiana Jones movie, Dial of Destiny or whatever it was, people want to see Indiana Jones. And the first 20 minutes of that movie where they've deaged Harrison Ford. And I understand that's expensive. And that felt like Indiana Jones. And I'm hearing good things, but there's a game out called The Great Circle right now. I'm hearing really good things about that game. But when it came to the rest of the movie, the movie was awkward and bad because they just,

they showed old, broken down. They deconstructed the hero. And that's kind of what they've done with Star Wars as well. We're going to deconstruct Han Solo. Like, forget the love story of Han Solo and Princess Leia. Now they're divorced and he's an absentee father because reasons. You know, and it's just like, well, like, we don't want our hero. deconstructed.

Okay? We don't want to be told that, hey, the heroes you loved, yeah, they're flawed and terrible. And here's some new heroes and we're going to take these guys apart. Like, it just, it doesn't sell. So we can talk about

what Disney doesn't know how to sell the fact of the matter, though. Biggest two movies this year are Inside Out 2 in Deadpool and Wolverine. Both of which are good movies, by the way. Both of which are pretty good movies. So Inside Out 2 was good because it had something new to say in a sequel.

And the original Inside Out, the main character, you know, young kid, experiencing these emotions. Now we have her in puberty and understanding things like anxiety. So there's something new to say from a director that has children and also like is able to bring real life into it. And Deadpool was actually, it was a real risk. It was an R-rated movie coming from Disney about superheroes, which is something that granted, it's a sequel, but people still like going to the movies to see superheroes and in the X-Men. Yeah. I mean, I liked both of them. I really did. I agree with what you said about Inside Out too.

Deadpool and Wolverine, I mean, the amount of character work for, I mean, I know it's an R-rated movie coming at a Disney, but, you know, it's not the first time. They used to, what was it, Miramax or whatever they had to deal with, they would release their R-rated stuff through. They can do that and the audience is there. But, I mean, like, you know, the audience has been built up in the prior to Deadpool movies. It's been built up in however many X-Men movies there are, which even when they changed, the main cast, they never recast Logan, right? They never recast Wolverine. It was always huge Jackman. The issue, the issue I see is that, you know, we, you can't make your money now in selling the, you know, selling the DVD and the Blu-rays after, right? You know, which kind of was the way it was

for for about 20 years there. It's like, even if you didn't make it back in your box office, you would make it back in DVD and Blu-ray sales later. We're not really doing that anymore because, well, because we don't. No one buys physical media. We all want to subscribe to 17 streaming services, apparently, instead. So a lot of these things, they're losing their shirts on them, and they haven't really found out a way to monetize them. And so what are they doing? They are really relying on existing IP. We're going to do sequels as much as possible, because at least we've got that kind of built-in audience and maybe entice you in, or we have to get smaller. And these are the two that hit, but I already mentioned how much I'm not a big fan of the Disney-era Star Wars with a couple. of exceptions. And I mentioned the Indiana Jones. It's like, it's, guys, he, at some point,

the mine, and even in the Marvel universe, which of course, Disney owns as well, like, they peaked with Endgame. End games five years ago now. It was 2019. And all of the Marvel since then, all the phase four and phase five, whatever we're doing, the TV shows, the movies, it's just been a steady degradation. And so it's nice what happened with Deadpool and Wolverine and it's good. But, you know, I don't have a lot of hope for a lot of the other stuff that's been coming out because it's, I mean, you know, does anyone remember what the plot of the Marbles or the Eternals was? Like two final points. And then I'm going to move to a question for hardcore, the hardcore investors listening. If you made it through that conversation on Disney and Star Wars, I want to make sure we leave you with a little treat, something to take home with you. So my two final points are one, the international box office is less reliable for big tent pole movies. And then the second is that Deadpool and Wolverine was the only. And big Marvel movie this year. I think both of those facts are important. All right, I had to say that. Now, we're going to go to a mailbag question that, you know, at the end of the year, I want to get to an advanced investing concept because in the beginning of the year, we're going to get

some more general stuff as we have newer investors welcomed to the show. So here's the question from Cowl Fool that I thought would be good for you, Jim. I'm thinking about using more options to generate income on the stocks that I own. This is selling a covered call. What should I know before doing this, And is there an advantage to doing this instead of just owning dividend paying stocks and doing a little less work? Well, the advantage is you can increase the income on the underlying stock by selling calls against it. The disadvantage, and I can go in a number of different directions here. Well, number one, first off, two, companies that pay dividends. So if you're going to sell a cover call on a dividends paying stock, dividends take down the price of the calls.

So, when you're selling it, you're arguably getting paid less than you should be. That's, you know, you have to get you a finance paper to show you how that works. But let's just say, selling cover calls on big dividend payers is going to pay you less. The problem that CalFool may be stepping in here is because they specifically say, generate income on stocks I own. Well, what is your cost basis in those stocks that you own? account are those stocks held in? If they're held in a tax-sheltered account, this is probably not that big of a deal. If they are held in a non-tax-sheltered account, let's say, I'm going to

pick on Starbucks, just because it's the one that comes to mine for, I think it's about $85 or $90 a share. If your cost basis is $10 a share and you say get paid $2 or $3 to sell a three-month call option against your shares, that money is yours to keep. You'd sell one call option for every 100 shares you own. But if the stock runs up, okay, if the stock goes from 85 where it is today, 87, where it's today, let's say it runs to $120 by the end of the three months because Brian Nicol is, you know, perceived to be turning the company around. If you sold, say, the $90 call option to generate income today, you are going to be scrambling to either buy those calls back and they're going to be a lot more expensive and it's going to, you know,

largely eliminate any profitability you could have had. Or you're going to say goodbye to your shares that maybe you don't want to say goodbye to, and you'll have a big tax bill. So always think about, am I doing this in a taxable account? If not, it's probably fine. You might end up selling something you don't want to sell too quickly, but at least there's no major tax implication. If it's in a taxable account, you might want to rethink this.

This is why when I was running Motley Fool options, my good friend Jim Mueller is running Motley Fool options today. He will say the same thing. It's we always preferred what's called the buy rights. So if you want covered calls and you're aiming for like 1% a month, which is a reasonably you can do it, maybe a little bit better actually, what you would do is you would buy shares in lots of 100 and then you would sell a call, one call contract against the shares you bought. way you're deliberately targeting income. Don't do it in an account where you already own shares. We

could lose those ones, taxes again. But just be careful and think about what you're doing. Think about the tax implications. And then as well, be sure you're okay waving goodbye to those shares. Because at some point, you will see a stock run up. You will see a call exercised against you. And then the final potential indignity is always be aware if you are going to sell covered calls on dividend-paying company, be aware once the stock price goes above the strike price on the call. And if we're heading towards the next dividend date, you might lose your shares early. And there's some formulas you need to worry about, but you might lose your shares early because the counterpart of your option might try to steal your dividend from you.

So just be aware and think through the implications of what you're doing here. It can be a fine. I do cover calls all the time. Just be aware. Good place to end it. Gets a run long today. No B segment. Jim Gillies, appreciate you being here.

Have a good holiday week and I think I'll see in the new year. Thanks, Ricky, you too. As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against to buy or sell stocks based solely on what you hear. All personal finance content follows Motleyful editorial standards and they're not approved by advertisers. The Motley Fool only picks products that would personally recommend to friends like you.

I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.